How U.S. Policy Shifts Are Affecting Organizational Incentive Plans

2025 has brought significant changes to U.S. economic policy — tariff upheaval being perhaps the most consequential. As a result, organizations have been carefully reassessing their human capital strategies, particularly around short- and long-term incentive plans.

Twenty-eight percent of the 68 organizations that responded to an October pulse survey by consulting firm WTW identified tariffs as a primary driver affecting their compensation strategies. Forty-nine percent cited related market volatility and economic uncertainty.

In addition, 59% of respondents anticipated tariff policy to have a direct impact on their organizations, with 24% citing a “large impact” and 35% citing “some impact.” Only around 10% foresaw no impact from tariffs.

Adjustments to Short-Term Incentives

In response to all this change, many organizations are examining — and perhaps adjusting — their compensation programs. For current-cycle short-term incentives (STIs), 45% of WTW survey respondents said they already have taken or plan to take action to adjust their incentive payouts.

Of those employers planning to act, 79% felt adjustments will lead to an increased payout of less than 20%, while 15% expected to increase payouts by more than 20% of the calculated score.

Almost half of those with a calculated payout below threshold are contemplating making an adjustment to threshold or higher. Half of respondents anticipated a corporate payout factor below target — both before and after any anticipated adjustments.

For the next incentive cycle, 66% of participants said they aren’t planning any changes to STI plans. Of the 34% that are planning changes, 57% are planning wider performance-goal ranges, and 30% are planning to adjust their performance metrics.

Adjustments to Long-Term Incentives

Actions to override long-term incentive (LTI) outcomes for the current cycle are less likely than actions for STIs, with only 31% of survey respondents stating they have taken or are considering action. Among this minority, 14% are planning adjustments for the cycle ending in 2025 to account for the impact of tariffs. Clearly, tariffs are having a larger effect on STIs. Yet, similar to STIs, actions to adjust LTI payouts are expected to move the payout upward by 20% or less in most cases.

For the next LTI grant, most organizations (59%) are not planning any changes. Among the 41% that are, 39% are considering wider performance goal ranges and 32% are considering adding or removing performance metrics, among other less cited actions.

Implications for STIs and LTIs

While the WTW data shows most organizations haven’t proactively changed their programs yet, we expect to see increased use of compensation committee discretion to adjust formulaic payouts at year end.

As tariff policies continue to frequently change, it becomes difficult for compensation committees to make definitive decisions before the end of the performance period. WTW recommends that, at this time, adjustments to calculated scores should wait until the end of the performance period, when the benefit of a more complete picture is available.

For organizations most directly affected by tariffs, more urgent action might be needed to give faith that some bonus will still be earnable. This will likely help incentive plan participants model the right behaviors and take the right actions to drive results.

When it’s time for a decision, compensation committees are likely to focus on management’s efforts to mitigate and manage against tariffs. The effort and impact of those actions likely will be a significant determinant of discretionary relief on STI outcomes.

From WTW’s work with boards in all industries, it sees organizations are currently having discussions regarding:

• Whether to adjust payouts;
• How much discretion to apply to incentive results;
• The extent to which any discretion might create affordability or financial reporting issues (toward STIs) or whether adjustments trigger an accounting modification (toward LTIs);
• What to do with next year’s programs;
• Understanding what these actions might mean for say-on-pay votes as well as proxy advisor vote recommendations; and,
• The reputation of the organization at large.

Each of these topics connects to broader governance questions on human capital, which we predict will become more nuanced — and critical — in the next three years.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Compensation
• Executive Compensation
• Finance and Budgeting
• Organizational Performance